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Chapter 9
MANAGING GOVERNMENT FINANCES: A GENERAL EVALUATION
Indicators of Fiscal Performance
9.1
This chapter presents a summarised position of government finances
over 1985-2006, with reference to certain key indicators that help in assessing
the adequacy and effectiveness of available resources, highlighting the areas
of concern, and capturing important facets of government finances. Fiscal
parameters of the Union Government have broadly been grouped under four
major components and for each component sets of indicators have been
conceived to assess the fiscal developments over time. The four major
components are resource mobilisation; expenditure management; management
of fiscal imbalances and management of fiscal liabilities.
Resource Mobilisation
9.2
Eight indicators shown in table 9.1 are included under this major
component to capture the adequacy of resources, growth of these resources and
returns on past investments, financial intermediation and capital expenditure
incurred to date. The revenue receipt to GDP ratio indicates the adequacy of
the present flow of resources for the provision of current services. Revenue
receipts comprise tax and non-tax receipts as well as recovery of user charges
for social and economic services provided by the government. The second
indicator of adequacy of resources is the tax-GDP ratio, a sub-set of the
revenue receipts. This ratio indicates the government’s access to such
resources for which there is no direct service provision obligation. Revenue
and tax buoyancy indicate the pace of resource mobilisation efforts. The other
four are indicators of return on past investment and recovery of user charges.
Table 9.1 summarises the movement in value of these indicators over
1985-2006, the VIII and IX Plans (1992-1997 and 1997-2002) and for the first
four years of the X Plan (2002-07).
Table 9.1: Indicators of Resource Mobilisation
(Per cent)
Indicator
Revenue Receipt/GDP
Gross Tax Receipt/GDP
Revenue Buoyancy*
Tax Buoyancy*
Return on Advances
Return on Investment
User Charges RecoverySocial Services
User Charges RecoveryEconomic Services
1985-2006
12.51
9.35
0.94
0.93
11.96
5.21
VIII Plan
(1992-1997)
12.71
9.32
0.94
0.96
11.23
2.35
IX Plan
(1997-2002)
12.40
8.68
0.78
0.86
14.15
5.30
2002-03
2003-04
2004-05
2005-06
12.14
8.76
1.59
1.90
15.11
8.83
12.29
9.22
1.11
1.50
15.91
9.84
12.14
9.82
0.89
1.59
14.30
13.29
12.20
10.37
1.05
1.46
13.36
18.78
6.68
9.57
3.59
2.03
1.91
1.49
4.28
52.34
57.22
55.80
43.07
45.27
51.37
45.39
* Revenue and Tax buoyancy coefficients are in ratios.
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Managing Government Finances : A General
Evaluation
9.3
The ratio of revenue receipts to GDP witnessed a decelerating trend.
Compared to the values during the VIII Plan (1992-1997), the ratio declined to
12.40 during the IX Plan (1997-2002) and further to an average of 12.19
during the first four years of X Plan (2002-07). Tax collections, however,
remained buoyant during the first four years of X Plan period and the same
was reflected in an increase in tax-GDP ratio. The ratio indicated continuous
improvement during the first four years of the X Plan (2002-07) and exceeded
10 per cent in the current year for the first time since 1992-93. Though there
was an improvement in tax buoyancy during the recent years, this needs to be
sustained. Revenue buoyancy, which was less than one during the VIII Plan
(1992-2002) and deteriorated further during IX Plan (1997-2002), not only
improved but also exceeded one in three out of four years during the X Plan
period. There appeared a positive improvement in return from investment and
loans and advances, but recovery of user charges witnessed significant decline
over the years. Resource mobilisation efforts, therefore, presented a somewhat
mixed picture.
Management of Expenditure
9.4
In expenditure management, eight indicators shown in table 9.2 were
identified to capture its growth and quality. Plan expenditure, capital
expenditure and development expenditure are indicators of the quality of
expenditure. The parameters of ratio of expenditure to GDP and buoyancy
(with reference to revenue receipt) indicate relationship of expenditure with
GDP and its responsiveness to changes in these parameters. Values of these
parameters over the defined time frame are indicated in Table 9.2.
Table 9.2: Indicators of Expenditure Management
Indicator
1985-2006
(Per cent)
VIII Plan
IX Plan
2002-03 2003-04 2004-05 2005-06
(1992-97) (1997-2002)
19.66
19.56
19.29
18.36
17.69
17.25
15.51
16.36
16.59
15.95
14.67
15.31
Total Expenditure/GDP
19.29
Revenue Expenditure/GDP
15.88
Revenue Expenditure/Total
82.31
78.88
Expenditure
Plan Expenditure/Total Expenditure
23.14
23.68
Capital Expenditure/Total
8.50
9.61
Expenditure
Development Expenditure*/
42.01
42.24
Total expenditure
Buoyancy of Total Expenditure
0.93
0.76
with Net Revenue Receipts (Ratio)
Buoyancy of Revenue Expenditure
1.04
0.94
with Net Revenue Receipts (Ratio)
* Development expenditure is total expenditure on social and
expenditure here excludes loans and advances.
83.61
85.99
86.83
82.93
88.74
20.99
23.40
24.13
24.20
23.08
7.01
6.40
6.98
9.77
9.21
40.40
39.96
40.10
38.69
41.31
1.09
0.53
0.49
0.75
0.76
1.28
0.70
0.57
0.32
1.30
economic services and the denominator total
9.5
As in the case of parameters on resources mobilisation, movement of
parameters relating to expenditure also presented a mixed picture. Capital
expenditure as a percentage of total expenditure witnessed deceleration to 7.01
131
Report of the CAG on
Union Government Accounts 2005-06
per cent during IX Plan (1997-2002) from the level of 9.61 per cent in VIII
Plan (1992-97). It however exhibited an acceleration trend during the last two
years and it almost regained the average level of VIII Plan period. The share
of development expenditure and plan expenditure in total expenditure
remained almost stable over time while that of revenue expenditure has
reflected an increasing trend and risen from an average of 78.88 per cent in
VIII Plan (1992-97) to 83.61 per cent in IX Plan (1997-2002) and further to an
average of 86.12 per cent during the first four years of the X Plan (2002-07).
The buoyancy of total and revenue expenditure with revenue receipts indicated
a mixed trend during the period 1985-2006.
Management of Fiscal Imbalances
9.6
Five indicators shown in table 9.3 were identified to capture
management of fiscal imbalances. These included the ratio of revenue, fiscal
and primary deficit to GDP, the ratio of revenue deficit to fiscal deficit and the
balance from current revenue (BCR). Though deficits are essentially the
outcomes of the government’s policy with regard to its receipts and
expenditure, they serve as useful proxies for fiscal health. The Fiscal
Responsibility and Budget Management (FRBM) Act of 2003 and Rules made
thereunder, as they stand now, has mandated the government to take
appropriate steps to (i) eliminate revenue deficit by 31 March 2009 and
thereafter build adequate revenue surplus, and (ii) to bring down the fiscal
deficit to not more than 3 per cent of GDP by 31 March 2009. The values of
these parameters over the specified periods as mentioned above are indicated
in Table 9.3.
Table 9.3: Indicators of Management of Fiscal Imbalances
(Per cent)
Indicator
Revenue Deficit/GDP
Fiscal Deficit/GDP
Primary Deficit/GDP
Revenue Deficit/Fiscal
Deficit
Balance From Current
Revenue (Rupees in crore)
3.37
5.49
1.08
2.80
6.04
1.77
IX Plan
(19972002)
3.95
6.25
1.49
61.47
46.26
63.26
81.56
124.77
75.82
66.51
-9849
-2191
-28622
-38195
-22348
8794
2161
1985-2006
VIII Plan
(1992-97)
2002-03
2003-04
2004-05
2005-06
4.44
5.45
0.41
3.66
2.93
-1.70
2.53
3.34
-0.87
3.11
4.67
0.67
9.7
The ratios of deficits to GDP and the ratio of revenue deficit to the
fiscal deficit indicate vulnerability of Union finances. Finances become
vulnerable to the extent that fiscal deficit is not used for creating assets, as
there is no addition to the repayment capacity and no asset back up for the
liabilities incurred. This ratio increased from an average of 46.26 per cent
during the VIII Plan (1992-1997) to the peak level of 124.77 per cent in 200304. It was for the first time that revenue deficit exceeded fiscal deficit. During
the subsequent years though the ratio indicated an improvement but still it is
considerably higher and exceeds the levels already achieved in VIII and IX
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Managing Government Finances : A General
Evaluation
Plan periods. Complete elimination of revenue deficit as mandated by the
FRBM Act 2003 may therefore need greater efforts. The ratio of fiscal deficit
to GDP, which had witnessed a sharp improvement in 2003-04 due to
augmented recovery of past loans, could not sustain the momentum even
though recoveries of loans and advances continued to exceed fresh advances
till 2004-05 and in the current year, the shortfall was only marginal. The fiscal
policy has a significant role in maintaining the macroeconomic stability but its
efficacy and effectiveness depends upon the structure of fiscal deficit.
However, the large structural fiscal deficit caused due to dominant share of
structural primary deficit and structural interest payments have reduced the
role that cyclical component of fiscal deficit can play during the periods of
macroeconomic fluctuations. The primary surplus, which was experienced
consecutively for two years in 2003-04 and 2004-05 for the first time in over
30 years again turned into a deficit in the current year mainly on account of
enhanced spending on social and economic services and grants in aid to States
and UT Governments. Balance from the current revenue indicates the nonplan revenue balances and if these are positive, there is to that extent, funding
of plan expenditure from the current revenue. BCR, which had turned negative
in 1990-91, became positive in 2004-05. BCR continued to be positive in the
current year but exhibited a declining trend. Greater efforts are needed to
address the fiscal imbalances which indicate deteriorating trend during the
current year.
Management of Fiscal Liabilities
9.8
Sustainability of debt is the key issue in the assessment of government
finances. Higher the debt to GDP ratio, larger is likely to be the cost at which
the government is able to borrow. Average rate of interest, difference between
the interest and GDP growth (referred as Domar gap) and the ratio of assets
(utilisation of borrowed funds) to fiscal liabilities are important indicators of
debt management. Debt redemption inclusive of interest as percentage of
borrowing also indicates the degree of autonomy in utilising available
resources for current applications. The higher this ratio, the lower is the
amount available from borrowings for application for current services. Values
of the seven indicators of management of fiscal liabilities are indicated in
Table 9.4 below.
Table 9.4: Indicators of Management of Fiscal Liabilities
(Per cent)
VIII Plan
IX Plan
Indicator
1985-2006
2002-03
(1992-97) (1997-2002)
Fiscal Liabilities/GDP 59.46
60.72
59.08
62.69
Debt Redemption to
95.89
93.10
94.70
97.87
Debt Receipt
Average Interest Rate7.93
7.91
9.06
8.90
Total Liabilities
Domar Gap
5.79
8.63
1.37
-0.69
Ratio of Assets to
45.96
57.68
50.90
44.78
Liabilities
133
2003-04
2004-05
2005-06
60.13
58.71
55.75
105.33
95.78
99.44
8.28
7.89
7.75
3.48
4.63
5.97
41.48
39.36
39.32
Report of the CAG on
Union Government Accounts 2005-06
(Per cent)
Indicator
Fiscal Liabilities/
Revenue Receipt
Buoyancy of Assets
VIII Plan
IX Plan
1985-2006
2002-03
(1992-97) (1997-2002)
2003-04
2004-05
2005-06
476
478
476
516
489
484
457
0.73
0.83
0.70
0.40
-0.10
0.43
0.98
9.9
Trends in parameters relating to the management of fiscal liabilities
also present a mixed picture. The debt to GDP ratio after getting consolidated
during the IX Plan (1997-2002) witnessed a sharp increase in 2001-02 and
after reaching the peak level in 2002-03 it exhibited the declining trend in
subsequent years. However, while the ratio got moderated in the last three
years due to a lower growth of fiscal liabilities relative to GDP, it is still
considerably higher. While the interest rate on fiscal liabilities increased
during the IX Plan, a deceleration was observed in the recent years.
Nevertheless, due to a larger overhang of debt, the Government could not avail
of the full benefits of moderation in the interest rate. The Domar gap remained
positive except during 2002-03. The ratio of assets to liabilities declined
consistently from an average of 57.68 per cent during the VIII five year plan
to 39.32 per cent in 2005-06 indicating that around 60 per cent of the
aggregate fiscal liabilities of the Union Government did not have any assets
back up. Assets were also growing at a lower rate than the fiscal liabilities.
Overall buoyancy of assets during 1985-2006 was 0.73 indicating that for each
one per cent increase in liabilities, assets had grown only at 0.73 per cent.
Buoyancy of assets continued to decelerate from VIII Plan period to 2003-04
when the assets actually declined over the previous year but in the subsequent
years buoyancy has picked up and reached the peak level in the current year.
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Managing Government Finances : A General
Evaluation
9.10 As resources available for application for current services have
depleted relative to GDP, it is critical that these are used with optimal
efficiency. These inefficiencies result from the inability to use the resources
in time, delaying projects and programme implementation rigidities like
lapsing of funds and opacities in budget proposals. These and other issues
pointed out elsewhere in this Report call for various measures of reform in
government finances and accounts, including budgetary operations of the
government.
(Dr. A.K. BANERJEE)
Director General of Audit
Central Revenues
New Delhi
Dated
Countersigned
New Delhi
Dated
(VIJAYENDRA N. KAUL)
Comptroller and Auditor General of India
135